The world is about to run out of oil storage and U.S. shale producers are selling crude for almost nothing but they are still refusing to shut production, hoping to survive the storm, one of the world’s biggest oil traders said.
The continuing production shows the challenges that Russia and Saudi Arabia are facing in their attempt to reduce competition from U.S. shale via low prices, Marco Dunand, chief executive of Mercuria Energy Group, said.
“In the United States, we are buying at levels close to zero but because of various pipeline, bank commitments they continue to sell. They keep on going because they hope when demand is back, they can come back to life. So shale is very resilient,” Dunand told Reuters in a phone interview.
Around 3 billion people are in lockdown worldwide. Gasoline and jet fuel demand have collapsed with airlines grounding their fleets, leaving financial and oil markets reeling in shock.
The United States could already be in recession judging by its record high 6 million jobless claims.
“Compared to a week ago, we had demand destruction going from 10 to 30 million barrels a day (bpd) so we’re not in a normal market. If you have an unknown prediction of 20 million barrels – nothing means anything anymore,” he said.
“We think refinery runs are down 15 million a day conservatively. Empirically, demand should be down 20 million barrels or more.”
When previously a supply change of 1 million bpd seemed huge, Dunand considered current production cuts “very small” at an estimated 2 million bpd globally, largely from Canada and the United States. Global oil demand is just under 100 million bpd.
Record low prices on different grades and products have become the new norm in the oil industry.
“OPEC, Russia and the United States what can they really do? Can they cut 10 million a day?” Dunand said.
On Thursday, Trump tweeted that he expected Russia and Saudi Arabia to announce production cuts of 10 to 15 million bpd, and his comments sent oil futures up 47%, a record gain, before resettling around $30 a barrel. [O/R]
The OPEC+ crude oil exporter group will debate cutting global supply by 10 million bpd, an OPEC source said on Friday. An emergency OPEC+ meeting is planned for April 6 and will be held as a video conference.
Meanwhile the true price for physical crude cargoes is much lower, in some cases zero or negative.
Dated Brent, the benchmark used to price more than half the world’s physical oil, served a harsh reminder when it fell $10 below futures on Wednesday.
Majors, traders and refiners are scrambling to sell what oil they have on contract and secure dwindling storage, the limits of which also see a range of estimates from analysts and top traders.
“We estimated that global storage availability is somewhere between 1.2 to 1.3 billion barrels. We think most of the storage is full, exceptions here and there. Sometimes it’s not physically full but maybe the oil is on its way,” Dunand said.
He said estimates for floating storage capacity varied widely to as high as 500 million barrels. Whatever the number, he still sees room offshore.
“Demurrage on ships is lower than contango so they’re happy to wait another month. So I suspect storage is full but no more than 50% because you can still find ships,” Dunand said.